How do I know if I’m ready to buy a home?
- Do I have a steady source of income? Have I been employed on a regular basis for the last 2-3 years? Is my current income reliable?
- Do I have a good record of paying my bills?
- Do I have a few outstanding long-term debts, like car payments?
- Do I have enough money saved for a down payment?
- Do I have the ability to pay a mortgage every month, plus additional costs?
If you can answer “yes” to these questions, you are probably ready to buy your own home.
How does the Lender decide the maximum loan amount I can afford?
The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-houses expenses include such long-term debts as car or student loan payments, alimony or child support. Monthly mortgage payments should be no more than 28% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 38% of income. The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.
What is a mortgage?
Generally speaking, a mortgage is a loan obtained to purchase real estate. The “mortgage” itself is a lien (a legal claim) on a home or property that secures the promise to pay the debt.
What is a Loan to Value (LTV) and how does it determine the size of my loan?
- The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000) and would have to pay, $2,500 as a down payment.
The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to pay out of their own funds. So to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require a mortgage insurance policy.
How large of a down payment do I need?
There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you’ll have. Mortgages with less than 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you’ll also need money for closing costs, moving expenses and possibly – repairs and decorating.
What is included in a monthly mortgage payment?
The monthly mortgage payment mainly pays off principle and interest. But most lenders also include local real estate taxes, homeowner’s insurance and the mortgage insurance (if applicable.)
What factors affect mortgage payments?
The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.
How does the interest rate factor in securing a mortgage loan?
A lower interest rate allows you to borrow more money than a high rate with the same monthly payment. Interest rates can fluctuate as you shop for a loan, so ask lenders if they offer a rate “lock-in” which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance and other fees included in the loan.
What is an escrow account? Do I need one?
Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner’s insurance, mortgage insurance (if applicable) and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments.
What steps need to be taken to secure a loan?
The first step in securing a loan is to complete a loan application. To do so, you’ll need the following information:
- Paystubs for the past 2-3 months
- W-2 forms for the past 2 years
- Information on long-term debts
- Recent bank statements
- Tax returns for the past 2 years
- Proof of any other income
- Address and description of the property you wish to buy
- Sales contract
During the application process, the lender will order a report on your credit history and a professional appraisal of the property you want to purchase.
What happens after I’ve applied for my loan?
It usually takes 4-6 weeks to complete the evaluation of your application. It’s not unusual for the lender to ask for more information once the application has been submitted. The sooner you can provide the information, the faster your application will be processed. Once all the information has been verified the lender will call you to let you know the outcome of your application. If the loan is approved, a closing date is set up and the lender will review the closing with you. After the closing, you’ll be able to move into your new home.